Downgrading Airlines on Traffic Concerns (LCC, UAL, LUV, ALK, SAVE)

The International Air Transport Association (IATA) paints a bleak outlook for passenger and freight carriers as economic worries intensify. And the impact of that weak forecast is beginning to take its toll on airlines stocks.

The IATA reported that passenger traffic rose 4.5% in August compared with August 2010, but that growth was considerably slower than the 6% year-over-year growth shown in July.  Freight traffic dropped -3.8% in August compared with August 2010. When August 2011 traffic is compared with July 2011 traffic, the passenger market fell by -1.6% and the cargo market fell by -1.3%.

At virtually the same time, an airlines industry analyst at Citi lowered his rating on US Airways Group Inc. (NYSE: LCC) from ‘hold’ to ‘sell’ and downgraded United Continental Holdings Inc. (NYSE: UAL) from ‘buy’ to ‘hold’. The downgrades were the result of lowered estimates of global GDP growth, continuing high levels of unemployment, and eroding consumer confidence.

There is something of a disconnect between the IATA report and the ratings changes by Citi. The Citi analyst recommended buying discount carriers such as Southwest Airlines Co. (NYSE: LUV), Alaska Air Group, Inc. (NYSE: ALK), and Spirit Airlines, Inc. (NASDAQ: SAVE). All these offer cheaper flights, of course, but they are also primarily US  domestic carriers, a group that the IATA says is a “source of weakness.”

US domestic passenger travel fell by -0.3% year-over-year in August. If the discount carriers are a better investment, it is only because they are being compared to higher-priced carriers who are likely to feel the pinch of fewer passengers sooner. But the low-priced airlines are also likely to have trouble attracting passengers as more people decide to stay close to home.

In the freight market, weakness in air freight shipments “represented a loss of market share to other transport modes,” according to the IATA. Maybe, but the container shipping business has not been exactly booming either recently.

Railroads, however, have been moving more freight, including intermodal (containers and trailers) freight. Intermodal volume was up 3% in the week ending September 24th, compared with the same week a year ago. That was the highest weekly gain in four years. Traffic in the western states rose 3.8% year-over-year in the week and container volume rose 3.3%, indicating perhaps that shipments from domestic sources are more than making up for weak volume at the west coast ports that get much of their traffic from China and the rest of Asia.

Passenger carriers are probably bracing for a slow quarter and hoping for the best. But until consumers become more confident in the economy, passenger traffic is very likely to remain depressed.

Paul Ausick